Economists Measure Winners and Losers

ByDavid R. FrancisJuly 1, 1993

Two economists, Robert Barro and Jong-Wha Lee, looked at the statistics for 116 countries from 1965 to 1985 and came up with these conclusions, some negative in character:

* Countries grew faster that began with lower real per capita gross domestic product (national output of goods and services) relative to their initial level of "human capital" in the forms of educational attainment and health. This is what Mr. Barro, a Harvard University professor, calls a "catch-up" factor. But the impact of a relatively high level of education by itself on economic growth, though positive, was "a bit disappointing," he says.

* Overly large government expenditures, if spent on non-productive programs, held back growth. Barro and Mr. Lee, a Korea University professor, excluded spending on defense and education in this comparison of nations.

* Government-induced distortions in the economy discouraged growth. The economists deduced a level of distortions by looking at the black-market premium for a country's currency.

* Political instability, represented by the number of times a nation experienced a revolution, slowed development.

Another economist, James Schmitz Jr. of the Federal Reserve Bank of Minneapolis, holds that the large differences in national growth rates over the decades have much to do with the incentives provided entrepreneurs to adopt new technology and create businesses. In many poor countries, the "establishment" discourages new entrepreneurs with high taxes and red tape.

Aside from such studies, the gains from free enterprise have become obvious in the past decade, prompting economic policy shifts in both communist and developing countries.

These studies and others make use of statistical comparisons of most countries in the world, pioneered by Robert Summers and Alan Heston at the University of Pennsylvania and their late colleague, Irving Kravis. They measure a country's output by valuing what goods and services a unit of its currency will buy. Comparisons are made between nations by utilizing these measures of "purchasing power." To Mr. Summers, such comparisons more accurately reflect the economic output of nations than comparisons base d on variable foreign exchange rates.

Every few years the International Comparison Program at the United Nations looks at market baskets and other statistics in many countries. The "Penn-World Tables" compiled by Professors Summers and Heston fill in yearly and country gaps, providing observations for 138 countries for about 40 years.

To Summers, it was a "great triumph" when the International Monetary Fund for the first time used purchasing power parity numbers, rather than exchange-rate comparisons, in its World Economic Outlook published in May.

That change caused some stir because it concluded that China's economy produced $1.7 trillion in goods and services last year, more than four times as much as previously measured. It ranked China as the third largest economy behind the United States and Japan. Germany is fourth. The IMF made its own calculation of China's output.

Purchasing power measures, though, do not necessarily reflect the economic clout of a nation. Christian Ossa, a UN economist, points out that Germany has six times the exports and 20 times the international financial transactions of China. Most of China's output meets the economic needs of its own 1.2 billion people.

Another study using 1960 through 1985 Penn numbers finds that poor nations, on average, aren't closing the huge economic gap with the rich industrial nations. But they are making progress and keeping up relatively.

"No absolute poverty trap exists," write economists Stephen Parente of Northeastern University and Edward Prescott of the University of Minnesota in the Quarterly Review of the Federal Reserve Bank of Minneapolis.

The richest 5 percent of the countries had 29 times more per capita output than the poorest 5 percent in 1985. People in the US, the richest country, were 43.3 times better off than those in Ethiopia, the poorest country.